As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis.
Americans owe a staggering $1.1 trillion on home equity loans -- and banks are increasingly worried they may not get some of that money back.To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.
Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures. But at a time when each day seems to bring more bad news for the financial industry, lenders defend the hard-nosed maneuvers as a way to keep their own losses from deepening.
It is a remarkable turnabout for the many Americans who have come to regard a home as an A.T.M. with three bedrooms and 1.5 baths. When times were good, they borrowed against their homes to pay for all sorts of things, from new cars to college educations to a home theater.
Lenders also encouraged many aspiring homeowners to take out not one but two mortgages simultaneously -- ordinary ones plus "piggyback" loans -- to avoid putting any cash down.
The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity -- the value of the properties minus the mortgages against them -- has fallen below 50 percent for the first time, according to the Federal Reserve.
Lenders holding first mortgages get first dibs on borrowers' cash or on the homes should people fall behind on their payments. Banks that made home equity loans are second in line. This arrangement sometimes pits one lender against another.
When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans -- a situation known as a short sale -- lenders with first liens must be compensated fully before holders of second or third liens get a dime.
In places like California, Nevada, Arizona and Florida, where home prices have fallen significantly, second-lien holders can be left with little or nothing once first mortgages are paid.
In December, 5.7 percent of home equity lines of credit were delinquent or in default, up from 4.5 percent in 2006, according to Moody's Economy.com.
I've always thought of home ownership as more of a safety net than an ATM. But I guess that was just me...
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